Qantas needs help to escape financial nosedive

December 5, 2013

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Qantas needs help to escape from its financial nosedive. The Australia carrier’s shares plunged 11 percent after it warned that it will report a pre-tax loss of up to A$300 million ($225 million) in the first six months of the year. Part of the problem is that the airline is a political hybrid, restricted from raising foreign capital but without the support openly state-backed rivals enjoy.

Qantas says it no longer expects to generate positive free cash flow in the current financial year. As part of a plan to eliminate A$2 billion of costs within the next three years and retain its investment grade credit rating, it will cut 1,000 jobs and the pay of its chief executive and board.

Aside from its own costs though, Qantas faces intense competition in the domestic market from Virgin Australia, whose balance sheet has been strengthened by bringing in Air New Zealand, Abu Dhabi’s Etihad Airways, and Singapore Airlines as investors. Together the three own 73 percent, which could rise to 80 percent after Virgin’s latest capital raising. That makes Qantas’ model of subsidizing its loss-making international operation with its domestic one look ever less sustainable.

It would help if the government decided what Qantas is supposed to be. On one hand, it’s a national champion: the Qantas Sales Act prevents any single foreign airline owning more than 25 percent. Yet the idea of the government providing capital directly, say through buying a stake, would be politically unpalatable. On the other hand, scrapping the act would still leave Qantas subject to another rule that caps foreign ownership at 49 percent for airlines that want to fly international routes as Australian carriers.

There is room for a compromise. One option would be for the government to guarantee Qantas’ debt, which would shore up its credit rating and reduce its costs. But that will be wasted unless Qantas sorts out its own strategy. A self-imposed target of retaining a 65 percent share of the domestic market, for example, is a recipe for pursuing revenue at the expense of profits. Keeping Qantas airborne should be a joint effort.

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